Many unsuspecting taxpayers will find themselves paying more income this
year because of the Alternative Minimum Tax (AMT). This odd sounding tax was
originally enacted in 1969 to force high income taxpayers to pay a minimum
amount of tax even if they used various types of tax shelters available at
that time.

One commentator said that the tax was aimed at 155 families with income
over $200,000 that paid little or no tax. Over the past 40 years, the AMT has
been changed some, but it is now estimated that over 2½ million
taxpayers are subject to the AMT.

What is the AMT?
The actual mechanics of the AMT can be complicated. In essence, after your
regular tax is calculated, you do another tax calculation with adjustments to
various income, itemized deduction and personal exemption amounts and use the
AMT tax rates of 26% to 28%. If the AMT calculation results in a higher tax,
the difference is added to your regular income tax. That "add-on"
is referred to as the alternative minimum tax.

What triggers the AMT?
The answers lie in the adjustments that are made and the relationship
between the AMT tax rates and your normal income tax bracket rates. Here is a
brief description of some of the adjustments.

The primary adjustment to your income can come from the exercise of
incentive stock options. Any difference between the exercise price and the
fair market value on the date of exercise is added to your income for AMT
purposes.

The itemized deductions that must be "added back" include most
state and local income taxes and property taxes. Personal exemption amounts
used to reduce your regular taxable income are not available for AMT
purposes. Several other less common items can trigger the AMT as well.

The 2003 Tax Act increased the AMT exemption to $58,000 for joint filers
and $40,250 for single filers.

The AMT is hitting more and more people as income levels rise and as
regular income tax rates are falling under the 2001 Tax Act and the 2003 Tax
Act. As other parts of the tax law have been adjusted for inflation, the AMT
has generally stayed the same. The result is that it is producing more and
more revenue for the federal government. Hopefully, Congress will address the
AMT at some point to make it applicable to those originally targeted.

This article is a very general discussion of the AMT. Everyone's tax
situation is different and deserves focused attention. If you think you may
be subject to the AMT, or if you are not comfortable with your understanding
of the tax laws, consult a qualified tax professional to get the advice you
and your taxes deserve.